When entering into commercial contracts, it is crucial to understand the implications of direct and indirect losses. The clarification and analysis of the concepts of direct and indirect losses, can assist you to navigate the complexities of commercial contracts for the benefit of your business.

Direct Loss

Direct loss, also known as general damages, refers to the natural result of a breach of contract. This loss does not take into consideration intervening factors. A simple example would be, if a supplier fails to deliver goods within a specified timeframe, the direct loss to the purchaser would be the monetary difference between the contract price and the price paid to obtain the goods elsewhere as a result of the necessity to have the goods delivered at a specified time.

Key points to consider about direct loss:

1. Predictability: Direct losses are typically predictable at the time the contract is entered into.
2. Causation: A clear, continuous chain of causation between the breach and the loss must be established.
3. Quantification: The losses are generally easier to quantify and establish, as the loss arises directly from the breach itself.

Indirect Loss

Indirect loss, or consequential damages, refers to the secondary effects of a breach of contract. These are losses which occur as a “knock on effect” of the initial breach. Using the previous example, if the delayed delivery of goods causes the buyer to miss a chain sale opportunity which was already pre-arranged, the lost profits from that missed opportunity would be considered an indirect loss of the breach.

Key points to consider about indirect loss:

1. Foreseeability: The loss must have been expected at the time the contract was formed. The case of Hadley v Baxendale is often relied upon when assessing foreseeability; the case highlights that the loss must have been within the reasonable expectation of both parties.
2. Proof: Indirect losses often involve greater speculation and evidence demonstrating the knock-on effects of the breach is required.
3. Contractual Clauses: Many commercial contracts include clauses that specifically limit or exclude liability for indirect losses.

Practical Considerations for Businesses

Understanding the distinction between direct and indirect loss is crucial when entering into commercial contracts. Here are some practical steps you can adopt:

1. Clear Definitions: Ensure the contract clearly defines what constitutes direct and indirect loss. Ambiguity can lead to disputes and unexpected liabilities.
2. Limitations and Exclusions: Consider including limitation of liability clauses which impose a limit to the amount of damages or exclude certain types of loss altogether.
3. Risk Assessment: Conduct a thorough risk assessment to identify potential areas of exposure.
4. Insurance: Evaluate whether your current insurance policies cover potential losses arising from a breach of contract. If not, consider obtaining additional coverage.
5. Documentation: Maintain detailed records of all communications and transactions related to the contract. The evidence can be invaluable in establishing your case should a dispute arise.


Evaluating and analysing direct and indirect loss in commercial contracts requires a keen understanding of legal principles and practical foresight. Having a deeper understanding of these principles can provide your business with certainty when entering into commercial contracts. Should you require any assistance with the above or any other matters relating to commercial contracts, please do not hesitate to contact Mario Mastantuono at Fisher Jones Greenwood LLP – email: [email protected], telephone 01245584517.